Cattle Market Depends on Rain in 2013

The cattle market still anticipates peak cattle prices for 2013 in nearly every segment of the industry, but it all depends on the weather.

"The 10-year cycle price high is due in the year ahead, which corresponds with a cycle low in the breeding herd and beef production," says Pro Farmer Editor Chip Flory. "But, the weather is clearly set to throw the cycle into question, and the cattle market for 2013 is as much a weather market as the corn market was in 2012."

In terms of fed cattle price, Flory says that two years ago analysts were talking about a 2013 high around $125, but that estimate is now bumped to $135 after that $125 level was hit in 2012. "Now, we can’t rule out a fat cattle bid touching $145 in 2013, that’s IF the weather cooperates and we get the pastures back. If we don’t get the pastures back, the cycle high will be pushed back to 2014 or whenever it finally decides to rain."

Overall, year-to-date cattle slaughter is down 3.5% but due to heavier weights beef production is down only 1.2%. When you look at cow slaughter, however, that is down 12.6 percent from last year. So the factory is still being culled.

"Smaller year over year reductions in recent weeks have reduced the magnitude of the decrease from last year," says Oklahoma State University ag economist Derrell Peel. However, at the current pace, 2012 beef cow slaughter will be over 11 percent of the January 1 cow herd inventory. This will make the fifth consecutive year of double digit beef culling rates."

He points out the average annual beef cow culling rate is 9.6 percent. In previous liquidation phases, beef cow culling has increased over 10 percent per year for only one or two years. Five years in a row of double digit beef culling has never happened since beef cow slaughter data became available in 1986. The liquidation in 2012 is less than 2011 and the beef herd is expected to be down roughly 1.6 percent on January 1, 2013. In order to halt the persistent beef cow liquidation, beef cow slaughter will need to drop by 13 percent or more, year over year, for each of the next two years. Beef cow culling rates usually drop to under 9 percent for two to four years during herd expansions.

Once rains come, producers will hold onto heifers and those with forage may even start expanding. But for producers in Texas and Oklahoma, there will be a wariness of jumping in too fast after surviving years of drought. With that limited number of replacements, producers can expect female breeding stock prices to climb once pastures return. The good news for cow-calf producers is calf prices are expected to reach record levels as well.

With so much depending on the weather and subsequent forage conditions, expect continued volatility for cattle prices. Keep in mind that volatility isn’t just in the cattle market, but the grain market as well.Pro Farmer News Editor Julianne Johnston says that volatility in the grain market will create opportunities to purchase feed. The key is not to lock in prices all at once, but rather purchase a portion of feed needs when an opportunity presents itself. That helps spread out the risk.

The Global Perspective. According to a report by Rabobank, global beef production in 2013 should be similar to 2012. (Read more from that report here.) Rabobank analyst Guilherme Melo said, "We expect to see global supply hovering around 2012 levels, with minor ups and downs being determined by the extent to which the increase in Southern Hemisphere will outpace the reduction in Europe and the U.S.

"On the demand side of the equation, the broader picture points to another year of relatively weak consumption on the back of the still sluggish economy, as world GDP is expected to grow only slightly in 2013. The scenario is worse where production is set to decrease, such as North America and Europe, which poses additional pressure for beef companies located in these regions to pass on rising cattle prices to consumers. Additionally, as such countries rely on grains to feed their animals they are likely to see a reduction in their competitiveness in the international market.with increases in Argentina, Australia and Brazil offsetting declines in the United States and Europe."

The report points to bullish factor for the industry is the strong need for supply discipline in the poultry and pork sectors. Rabobank thinks production cuts are likely to come about, driven by negative margins in the wake of severe feed cost increases. To the extent that this increases poultry and pork prices, it may also benefit the beef industry as the gap between beef and these two meats prices narrows and possibly shifts demand towards beef.